Focus On Huawei, Steel In EU-China Trade Wars

EU lodges complaint against China steel tariffs

China was on holiday much of this week for the annual Dragon Boat Festival, but there was no respite for the building trade hostilities between Beijing and the EU that are quickly souring bilateral relations. Last week Beijing launched a probe into unfair state support against EU wines and hinted at another similar probe into luxury cars, targeting 2 product areas where European names have successfully tapped the China market. (previous post) Now this week Europe is firing back with a complaint against punitive steel tariffs launched by Beijing, while Britain is making its own worrisome noises about the safety of telecoms equipment from Huawei Technologies.

The Huawei development is probably the bigger cause for concern because it marks the first time we’ve heard these kinds of national security issues raised in Europe, which is easily the biggest overseas market for both Huawei and crosstown rival ZTE (HKEx: 763; Shenzhen: 000063). More broadly speaking, this continued escalation in trade disputes is starting to look like it could spin out of control if the 2 sides aren’t careful, potentially kicking off a disastrous war of protectionism that would benefit nobody.

Let’s start with a closer look at Huawei, which drew unwanted attention when a British government report was critical of its past sales of telecoms equipment to local telecoms giant BT (London: BT). The Huawei-BT relationship goes back nearly a decade, and the British telco was one of the first major Western European carriers to start buying equipment from Huawei.

Now a report from Britian’s parliamentary intelligence and security committee is expressing “shock” that government ministers weren’t informed of the Huawei-BT relationship until a year after BT started purchasing Huawei equipment in 2005. (English article) Last year, Washington banned Huawei and ZTE from selling their networking equipment to US telcos due to concerns about the potential for spying by Beijing. Neither the US or Britain have cited any specific evidence for spying, but instead point to potential ties between Huawei and the Chinese government as the basis for their concern.

After the report’s release, Britain’s China Ambassador Sebastian Wood issued his own official statement saying the UK welcomes investment from China and singled out Huawei as a “long-term valued investor in the UK.” (English article) Wood further expressed his views that networks built with Huawei equipment are safe and secure.

The British report comes as the EU’s trade commissioner is already investigating Huawei and ZTE for receiving unfair support from Beijing, allowing them to undercut rival products from European rivals like Ericsson (Stockholm: ERICb) and Alcatel Lucent (Paris: ALUA). The addition of these national security concerns to the existing trade dispute are likely to mean that both Huawei and ZTE will see their sales to EU telcos drop sharply for the next year or two until the issues are resolved.

From Huawei, let’s take a quick look at the EU’s other latest action, which has it filing a formal complaint with the World Trade Organization (WTO) about punitive Chinese tariffs against European stainless steel tubes. (English article) I’m not particularly knowledgeable on this subject, but one expert quoted in the coverage points out that this kind of dispute is relatively routine between China and its trading partners and by itself wouldn’t be a huge cause for concern.

But against the backdrop of the increasing trade friction in telecoms equipment and another dispute involving solar panels, this latest WTO complaint hardly looks positive. We saw some earlier signs that China and the EU would try to mediate a resolution to the solar panel dispute, and that still looks likely to happen. Such a positive development is sorely needed right now to change the tenor of the increasingly bitter atmosphere building up in EU-China trade relations.

Bottom line: The EU and China need to take steps to tone down the rhetoric in their increasing number of trade disputes or risk a damaging series of trade wars.

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